Financial Risk Management For Dummies – Book Review by Martin S. Fridson, CFA, The Finance Professionals’ Post

Financial Risk Management for Dummies. 2016. By Aaron Brown. John Wiley & Sons, Ltd., www.wiley.com. 384 pages, $26.99.

The dummies to whom Financial Risk Management for Dummies is addressed are not outright novices. Rather, they exemplify the maxim that a little bit of knowledge is a dangerous thing. Aaron Brown, chief risk officer of AQR Capital Management, devotes much of the book to dispelling mistaken notions about his subject.

“Risk management is not about predicting or preventing disaster,” he writes. Neither, says Brown, is it about estimating probabilities or outcomes. The “frequentist” approach, with its analogies to casino games, has only limited application. “If all risks were playing roulette or drawing cards,” Brown states, “we wouldn’t need risk managers.” There is little in the book about measuring risk because generally speaking, risk that is measurable can be avoided, insured, hedged, or neutralized via diversification. Contrary to the likely expectations of many investment professionals, Value at Risk (VaR) does not enter the discussion until Chapter 6.

In view of the book’s masterful demolition of wrongheaded ideas, its readership should not be limited to aspiring risk managers. It constitutes essential reading as well for traders, portfolio managers, hedge fund investors, shareholders of financial institutions, and anyone else affected by risk management who has only a vague and probably incorrect understanding of what risk managers actually do. Brown makes his exposition accessible to the non-quants within those ranks by presenting almost no math more advanced than arithmetic. He also supplies valuable insights into the inner workings of trading markets, highlighted by a description of the way in which stop-loss orders prevent prices from moving straight to the level warranted by fundamental news.

When Brown at last takes up the topic of VaR, he disabuses readers of the common misconception that it represents a risk measure or a worst-case outcome. VaR is actually the best-case loss on the worst five per cent of days (in the case of a 95 percent one-day VaR). Many people often become incensed when an institution loses more than its VaR amount, yet it is expected that the one-day loss will exceed that amount more than once a month.

Brown, whose previous books include an exploration of the links between gambling and speculation, The Poker Face of Wall Street, excels at incorporating colorful and entertaining material into his highly instructive text. He reports, for example, that after a supposedly non-fiction book about alien abduction became a bestseller in 1987, the Florida-based St. Lawrence Agency sold more than 20,000 alien-abduction insurance policies.[1] In a discussion of statistical fallacies, Brown notes that if people’s height truly were normally distributed, some would have negative height, since a normal distribution includes all values from infinity to negative infinity.

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Financial Risk Management For Dummies – Description

Financial Risk Management For Dummies by Aaron Brown

Take the risk out of financial risk management

Written by bestselling author and past winner of the GARP Award’s Risk Manager of the Year, Aaron Brown, Financial Risk Management For Dummies offers thorough and accessible guidance on successfully managing and controlling financial risk within your company. Through easy-to-follow instruction, you’ll find out how to manage risk, firstly by understanding it, and then by taking control of it. Plus, you’ll discover how to measure and value financial risk, set limits, stop losses, control drawdowns and hedge bets.

Financial risk management uses financial instruments to manage exposure to risk within firms, large and small—particularly credit risk and market risk. From managing and measuring risk to working in financial institutions and knowing how to communicate risk to your company and clients, Financial Risk Management For Dummies makes it easy to make sense of the management of risk when working in various different financial institutions and concludes by covering the topic of how to communicate risk — how to report it properly and how to deal with and comply with all of the regulations.

  • Covers managing risk and working as a financial risk manager
  • Provides everything you need to know about measuring financial risk
  • Walks you through working in financial institutions
  • Demonstrates how to communicate risk

If you work in the financial sector and want to make financial risk management your mission, you’ve come to the right place!

Financial Risk Management For Dummies – Review

From the Back Cover

Learn to:

  • Recognise financial risk and successfully manage it
  • Analyse the different risk methodologies and apply them effectively to your situation
  • Utilise complex risk management tools such as stop losses, drawdown control and hedging
  • Build upon your success by complying with risk regulations and understanding risk reporting

Take the risk out of financial management

Frazzled by financial management? Through easy-to-follow instruction, this friendly guide shows you how to manage risk, firstly by understanding it and then by taking control of it. Plus, you’ll discover how to measure and value financial risk, set limits, stop losses, control breakdowns and hedge bets.

  • Tackle risk head-on – find out how to take charge of risk, manage your financial risk and work as a financial risk manager
  • Stop stressing – discover how to measure your financial risk, prep yourself for anything that may come your way and get comfortable with pushing the boundaries
  • Know that the sky’s the limit – manage your financial risk by setting limits, stopping losses, controlling drawdowns and hedging bets
  • Work it – get the lowdown on working in financial institutions, from understanding how traders work to making sense of portfolio management–and everything in between
  • Talk the talk – communicate risk, deal with regulations and avoid the ‘Tower of Babel’

Open the book and find:

  • How to work with financial risk
  • Ways to set and understand limits
  • The ins and outs of portfolio management
  • Everything you need to know about managing asset risk
  • How to help regulators (and yourself)
  • Ten great risk managers in history
  • Risk management tips you can’t be without

About the Author

Aaron Brown is managing director and risk manager at AQR Capital Management and the 2011 GARP Risk Manager of the Year. He wrote Red-Blooded Risk and The Poker Face of Wall Street. He was named Financial Educator of the Year by the readers of Wilmott Magazine and his website won a Forbes Best of the Web award for Theory and Practice of Investing.

Financial Risk Management For Dummies

Financial Risk Management For Dummies by Aaron Brown